Exploring Investment Opportunities in iShares Core High Dividend ETF (HDV)
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The iShares Core High Dividend ETF (HDV) is a popular choice for investors seeking high-yield dividends from U.S. stocks, all while keeping expenses low. However, its performance compared to other dividend ETFs has been lackluster in recent years. Understanding why is crucial before making an investment decision.
The Lowdown on HDV
An exchange-traded fund (ETF), such as HDV, allows you to invest in a diverse group of stocks or bonds with a single transaction. This iShares ETF specifically tracks the Morningstar Dividend Yield Focus Index. The index excludes certain ETFs that only focus on yield, and instead, applies three additional filters to weed out riskier stocks.
- Economic moat rating: Morningstar analysts assess the competitiveness and strength of each company. Those with strong brand power, cost advantages, or unique factors that protect them from competition earn higher ratings.
- Uncertainty rating: This metric measures the predictability of a company's future earnings. The more stable a company's profits, the more likely they are to maintain their dividend payments.
- Distance to default score: This score evaluates a company's financial health by analyzing its volatility and debt levels. Companies with heavy debt loads and unstable stock prices are filtered out to protect against possible dividend cuts.
By incorporating these three factors, HDV aims to provide high-yield dividends with a lower risk of cuts.
Purchase Guidelines
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Investing in the iShares Core High Dividend ETF is in line with your regular brokerage account process:
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- Log into your brokerage account and search for HDV in the platform's search bar.
- Decide on the desired number of shares based on your investment goals and portfolio allocation.
- Select an order type, either a market or limit order.
- Confirm the order details and submit it.
- Review your transaction to ensure it was successful.
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A Peek at the Portfolio
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HDV's holdings are quite concentrated in two sectors: consumer staples and energy stocks. This sector focus, while providing an opportunity for steady yields, also limits overall diversification. Additionally, the ETF undergoes reconstitution and rebalancing every quarter, leading to a high turnover rate (67%).
Is HDV the Right Choice for You?
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Although the HDV ETF boasts a low expense ratio (0.08%) and relatively high yield, some investors might find the ETF not the best option due to its relative complexity, high turnover rate, and lack of full transparency in its index methodology, which relies on analyst scores. Simpler dividend ETFs with a broader range of holdings and less frequent rebalancing can be preferred for those favoring stable dividend growth strategies.
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Sources:
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[1] Morningstar analysts' allocation: https://www.ishares.com/us/funds/ISDV[2] Morningstar screening criteria: https://www.ishares.com/us/product/docs/Literature/0001857652-382864-1014152-000001.pdf[3] Moody's Analysis on Dividend ETFs: https://www.moodysanalytics.com/-/media/ea/docs-icc/elevate/territories/american/en-us/documents/MoodysAnalyticsEE141115012944384342874.pdf?rev=4235f3b1353147cba65b12267e6f82f2
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- Despite its popularity, the iShares Core High Dividend ETF (HDV) has underperformed other dividend ETFs in recent years, making it crucial for investors to understand why.
- One of the advantages of investing in an ETF like HDV is its ability to provide high-yield dividends with lower risk, as it incorporates factors such as economic moat rating, uncertainty rating, and distance to default score.
- Although HDV has a low expense ratio and relatively high yield, some investors might prefer simpler dividend ETFs with a broader range of holdings and less frequent rebalancing due to its complexity, high turnover rate, and lack of full transparency in its index methodology.
- To invest in the iShares Core High Dividend ETF, you can follow the typical process of logging into your brokerage account, searching for HDV, deciding on the number of shares, selecting an order type, and confirming the details before submitting.
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